The many faces of corporate governance
By Staff -- Manufacturing Business Technology, 9/1/2004 12:00:00 AM
A handful of survey findings present a mixed picture regarding the current status of corporate governance, given recent, highly publicized corporate malfeasance trials and stricter federal regulatory requirements.
An analysis of 120 companies in the S&P 500 done by RateFinancials, a New York City-based independent financial research firm, reveals that "obfuscating financial reporting remains a pervasive practice in corporate America." A third of those examined received "below average" or "poor" ratings regarding financial portrayal accuracy. Findings of particular concern included:
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75 percent used complex devices to shift long-term financial obligations from balance sheets;
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64 percent made unreasonable assumptions and forecasts of pension liabilities; and,
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28 percent used aggressive revenue recognition techniques.
"Despite the provisions of Sarbanes-Oxley, investors cannot accurately evaluate the securities of a significant portion of companies in the S&P based on their financial statements," says Victor Germack, founder and president of RateFinancials.
In a recent issue of Financial Analysts Journal, a study reports that as the number of independent directors on corporate boards goes down, charges of fraud go up. The comparative study also found that companies accused of committing fraud had lower percentages of outside or independent directors.
Of particular concern, the study found that those accused of fraud were more likely to have a board compensation committee.
"The implication is that compensation committees have been ineffective in evaluating and properly rewarding the performance of top executives," authors of the study wrote.
The authors lauded new rules of the New York Stock Exchange and NASDAQ, which mandates a majority of independent directors on publicly traded companies.
A survey of 1,359 CFOs of privately-held companies found that nearly half had instigated accounting practice changes in the wake of Sarbanes-Oxley, despite being outside the mandate of new federal regulations. The study, conducted by Robert Half Management Resources of Menlo Park, Calif., found that of the 48 percent of respondents who had made changes, key areas of focus included: 44 percent in payroll/benefits; 37 percent in expenditures/purchasing; 31 percent in accounts receivable/sales; 31 percent in capital assets, and; 31 percent in conversion/inventory.
The first research project of the newly formed Business Roundtable Institute for Corporate Ethics housed at the University of Virginia Darden Graduate School of Business Administration, Charlottesville surveyed its 150-member CEOs to assess corporate America's ethical landscape. The "Mapping the Terrain" report found that 81 percent believe corporate ethical standards have risen, and 74 percent have engineered changes in how ethics issues are handled. Top ethical priorities among surveyed CEOS include: regaining public trust, effective company management in today's investment climate, ensuring integrity of financial reporting, executive compensation fairness, and ethical role modeling of senior management.
